Case Name: Klein v. Tesla, Inc.
Case No.: 2017-1-CV-308617

On April 17, 2017, petitioner R. Andre Klein (“Klein”) filed a petition for writ of mandate against respondent Tesla, Inc. (“Tesla”), a Delaware corporation, alleging that, by letter dated February 6, 2017, Klein requested to inspect certain books and records of Tesla, but that the request was refused. (See petition, ¶¶ 4-5.) Klein asserts that he “has rights of inspection under Delaware law, 8 Del. C. § 220,” and that “Delaware law provides a remedy of specific performance for a corporation’s refusal to produce documents in contravention of 8 Del. C. § 220,” and that “Delaware law also provides for economic relief as a result of wrongful refusals of books-and-records demands.” (Petition, ¶¶ 7-9.)

The February 6, 2017 demand letter, attached to the petition states:

Stockholder seeks to investigate potential breaches of fiduciary duty in connection with Tesla’s acquisition of SolarCity in 2016, which unfairly benefitted Mr. Elon Musk and others to the detriment of Tesla. The investigation of potential corporate mismanagement or wrongdoing is a proper purpose under Delaware law. See Amalgamated Bank v. UICI, 2005 Del. Ch. LEXIS 82, at *15, 24 (Del. Ch. June 2, 2005) (finding that inspection of corporation’s books and records related to stockholder’s investigation of potential breaches of fiduciary duty was allowed as that was a “proper purpose”); Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007) (“There is no shortage of proper purposes under Delaware law, but perhaps the most common proper purpose is the desire to investigate potential corporate mismanagement, wrongdoing or waste,” internal quotation marks and citations omitted).

Pursuant to Delaware General Corporation Law Section 220 (“Section 220”), Stockholder hereby demands the right to inspect and copy the following books and records of the Company (unless otherwise specified, the time period relating to this request is July 1, 2015 to the present), including in all cases complete versions of each document:

1. Any documents that have already been produced or that the Company is planning or intending to produce to any other stockholders making similar demands for inspection of books and records under Section 20 or any analogous statute, including all documents already produced to the stockholders in Arkansas Teacher Retirement System et al. v. Elon Musk et al, C.A. No. 12740 (Del. Ch.)….

(Petition, exh. A.)

The corporate bylaws of Tesla, as amended as on February 1, 2017, and in effect at the time of Klein’s demand letter, includes a forum selection clause, which states:

ARTICLE XI – EXCLUSIVE FORUM

Unless the corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer or other employee of the corporation to the corporation or the corporation’s stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, (iii) any action asserting a claim against the corporation or any current or former director or officer or other employee of the corporation arising pursuant to any provision of the DGCL or the certificate of incorporation or these bylaws (as either may be amended from time to time), (iv) any action asserting a claim related to or involving the corporation that is governed by the internal affairs doctrine, or (v) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL shall be a state court within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware).

(Amended and Restated Bylaws of Tesla, Inc., Article XI, p. 25.)

Respondent Tesla demurs to the petition on the grounds that the Court lacks subject matter jurisdiction over the cause of action in the petition, and that the petition fails to state facts sufficient to constitute a cause of action. Tesla also moves to dismiss for forum non conveniens in light of the forum selection clause and traditional forum non conveniens factors.

As a preliminary matter, Klein’s opposition is 22 pages in length, in violation of Rule of Court 3.1113, subdivision (d). Accordingly, it shall be considered in the same manner as a late-filed paper. (See Rule of Court 3.1113, subdivision (g).)

Motion to dismiss on the ground of forum non conveniens

As both parties state, “[a] defendant may enforce a forum-selection clause by bringing a motion pursuant to sections 410.30 and 418.10, the statutes governing forum non conveniens motions, because they are the ones which generally authorize a trial court to decline jurisdiction when unreasonably invoked and provide a procedure for the motion.” (Cal-State Business Products & Services, Inc. v. Ricoh (1993) 12 Cal.App.4th 1666, 1680.) Both parties also acknowledge that “the modern trend is to enforce mandatory forum selection clauses unless they are unfair or unreasonable.” (Berg v. MTC Electronics (1998) 61 Cal.App.4th 349, 358.) “[A] motion based on a forum selection clause is a special type of forum non conveniens motion. The factors that apply generally to a forum non conveniens motion do not control in a case involving a mandatory forum selection clause.” (Id.) “[I]f there is a mandatory forum selection clause, the test is simply whether application of the clause is unfair or unreasonable, and the clause is usually given effect. Claims that the previously chosen forum is unfair or inconvenient are generally rejected. A court will usually honor a mandatory forum selection clause without extensive analysis of factors relating to convenience.” (Id. at pp.358-359.) “Given the importance of forum selection clauses, both the United States Supreme Court and the California Supreme Court have placed a heavy burden on a plaintiff seeking to defeat such a clause, requiring it to demonstrate that enforcement of the clause would be unreasonable under the circumstances of the case.” (Lu v. Dryclean-U.S.A. of California, Inc. (1992) 11 Cal.App.4th 1490, 1493.) “If, by contrast, a clause merely provides for submission to jurisdiction, and does not expressly mandate litigation exclusively in a particular forum, the normal forum non conveniens analysis applies.” (Berg, supra, 61 Cal.App.4th at p.359.)

Klein argues that the subject forum selection provision is permissive rather than mandatory, citing Animal Film, LLC v. D.E.J. Productions, Inc. (2011) 193 Cal.App.4th 466. (See Pl.’s opposition to demurrer and motion to dismiss, p.18:11-25.) However, in Animal Film, supra, the forum selection clause merely stated that “the parties hereto submit and consent to the jurisdiction of the courts present in the state of Texas in any action brought to enforce (or otherwise relating to) this agreement.” (Animal Film, supra, 193 Cal.App.4th at p.470.) Clearly, this clause “merely provides for submission to jurisdiction, and does not expressly mandate litigation exclusively in a particular forum.” In contrast, the subject forum selection provision is entitled “EXCLUSIVE FORUM”, and states that “the sole and exclusive forum” for a shareholder derivative action such as Klein’s “shall be a state court within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware).” Despite the mandatory language of the clause, Klein asserts that the clause’s opening language that states “[u]nless the corporation consents in writing to the selection of an alternative forum” allows Tesla to “unilaterally break free from the submission to the exclusive jurisdiction of the chosen forum” and thus “is akin to the ability of a party to a ‘permissive’ forum selection clause that ‘provides for submission to jurisdiction in a particular forum without mandating it.’” (Opposition, p.18:19-25, quoting Animal Film, supra, 193 Cal.App.4th at p.471.) However, the language here is clearly mandatory, and the fact that Tesla can waive the forum selection clause if it consents in writing to the shareholder’s proposed alternative forum does not suggest that Tesla can unilaterally break free from the provision; the shareholder can still enforce the terms of the mandatory forum selection provision as to Tesla. As Tesla argues, the language of the forum selection provision is like that of Lu and Cal-State Business Products & Services.

Klein also argues that the forum selection clause in Tesla’s bylaws is unenforceable because the board of directors amended its bylaws without vote by, consent by, or negotiated with, its shareholders and thus fails for lack of mutual assent. (See Opposition, p.15:1-19.) Relying principally on Galaviz v. Berg (N.D. Cal. 2011) 763 F.Supp.2d 1170, Klein argues that the forum selection clause in Tesla’s bylaws is unenforceable because it was unilaterally adopted by the alleged wrongdoers. (See Opposition, pp.15:20-28, 16:1-28, 17:1-12.) However, Galaviz has been criticized and indeed, there is a split on this issue in California’s federal courts. (See In re: CytRx Corp. Stockholder Derivative Litigation (C.D. Cal., Oct. 30, 2015, No. CV146414GHKPJWX) 2015 WL 9871275, at pp. *2-*7 (criticizing and distinguishing Galaviz, supra).) In Boilermakers Local 154 Retirement Fund v. Chevron Corp. (Del. Ch. 2013) 73 A.3d 934, the Court of Chancery of Delaware note that under Delaware law, “the bylaws… regulate suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine… [and thus,] the bylaws are valid and enforceable contractual forum selection clauses.” (Id. at p.939.) However, under the internal affairs doctrine, Delaware law should generally govern a question regarding the validity of bylaws and bylaw amendments. (Lidow v. Super. Ct. (International Rectifier Corp.) (2012) 206 Cal.App.4th 351, 359.) Klein is a New York resident and Tesla is a Delaware corporation. The action is for a breach of a Delaware statute. It does not seem unreasonable under the circumstances in this case to enforce the forum selection provision. For these and other factors, pursuant to Lidow, Delaware law applies. As such, Boilermakers Local 154 Retirement Fund, supra, mandates that Delaware is indeed the proper forum.

Tesla’s motion to dismiss is GRANTED, and the action will be dismissed without prejudice.

The Court will prepare the Order. After Tesla has filed and served notice of entry of the order signed by the Court, Tesla shall submit a proposed judgment of dismissal either approved as to form or with proof of compliance with Rules of Court, Rule 3.1312.